Module-1: Introduction to Economics

❖ Meaning and important definitions of economics

❖ Scope of economics: basic economic problems: what, how
and for whom to produce
❖ Nature of economics: whether it is a science or arts
❖ Ten principles of economics
❖ Microeconomics and Macroeconomics
❖ Positive and Normative economics
 Origin of Economics

● Origin of Economics can be traced to ancient times

● Thoughts on economics can be found in the ancient literatures

● Economics was earlier studied as a part of state activities

(Politics), ethics, philosophy etc.
 Greek Philosopher Plato (427-347 BCE)

● Agriculture is the most desirable occupation

● Interest on the loans should be prohibited
● Division of Labour: Every individual should do that is best suitable for him
 Greek Philosopher Aristotle (385-323 BCE)

● Supported the institution of private property as private property is more

productive than the public property.
● If population is not controlled, it will result in poverty and increased crime
rates.
● Interest taking is unjust.
 Indian Scholar Kautilya (375-285 BCE)

● Wrote a famous book ‘Arthashastra’

● It gives details of political, social and economic life in the Mauryan period
 Economic Thoughts of Kautilya
● Wealth included money, commodities, precious metals, labour and forests
also.
● Acquiring wealth is a safe method for protecting people against famines.
● Agriculture, animal husbandry and trade - Major sources of wealth
● Value of land should be determined by its fertility
● Fair prices of agriculture produce were fixed by the state
● Suggested some methods of settlement of disputes between employer and
workers
● Highlighted the idea of welfare state

“In the happiness of his (King’s) subjects lies his happiness, in their
welfare, his welfare” - Kautilya
 Indian Scholar Thiruvalluvar (3rd Century AD)

● Believed to belong to the ‘Sangam Age’ - Tamil Nadu

● Book: Thirukkural (Book on ethics)
● Tried to connect ethics and economics
 Economics Thoughts of Thiruvalluvar
● Agriculture is superior to all the occupations
● Rains are the basic support of life & it forms the basis of stable economic life
● Passing reference of factors of production - Land, Labour, Capital,
Organization, Technology etc.
● Self reliant economy- against seeking external assistance
● Freedom from hunger is one of the fundamental freedoms
● Wealth should be acquired by honourable and noble means
● Welfare state- there should be no poverty, illiteracy etc. State should ensure
perfect health, prosperity, happiness and full security for its subjects.
 Meaning of Economics
● The word ‘economics’ is made from ‘economy’ & the word ‘economy’ is
itself derived from a Greek word ‘Oikonomos’

Oikonomos= One who manages household

Economics is the study of how society manages its decisions

 Important Definitions of Economics

1) Adam Smith

- Scottish economist studied at Glasgow & Oxford University

- ‘Father of Economics’
- Published a book ‘An Enquiry into the Nature and Causes of Wealth of
Nation’ (1776 AD)
 Important Definitions of Economics
1) Adam Smith
● Founder of classical school of Economics.
● According to Adam Smith, “Economics is the science of study of
wealth of nation”.

Wealth Quality of Life Efficiency or Productivity

● Adam Smith was an advocate of free market/ Laissez faire economy

in which the role of the government is limited to;
1) National Defense
2) Judicial system for the enforcement of contracts
3) Uniform system of weights, measures and currency
 Important Definitions of Economics
1) Adam Smith
● According to Adam Smith, markets left on their own are capable of
achieving efficiency.

● What is the driving force of the market which automatically enable it to

achieve efficiency?
➢ Invisible hand of greed or self interest or competition

● Illustration with the help of example:

 Important Definitions of Economics
2) David Ricardo

- British Classical Economist

- ‘Principles of Political Economy and Taxation’ (1817)
 Important Definitions of Economics
2) David Ricardo

According to David Ricardo, “Economics studies how the total produce of

the earth is distributed”

- The subject matter of economics is to study how is the income, wealth

and total output are distributed.
 Important Definitions of Economics
3) Alfred Marshall

● A british economist
● Founder of Neo-classical school of Economics
● Published a famous book ‘Principles of Economics’ (1890 AD)
Schools of Thoughts in Economics
 Important Definitions of Economics
3) Alfred Marshall

“Economics is the study of mankind in the ordinary business of life, it

examines that part of the individual and social action which is most closely
connected with the material requisites of the well-being”

→ Economics is based on man’s ordinary business of life i.e. efforts

of man to satisfy human wants (wealth getting and wealth using activities)

→ Economics is a social science: studies only those economic aspects

of social life which increases the material welfare (standard of living)
 Important Definitions of Economics
4) Lionel Robbins

- A british economist
- Published a book ‘Nature and Significance of Economic Science’ (1932)
- Most accepted and scientific definition of Economics
 Important Definitions of Economics
4) Lionel Robbins

● According to Lionel Robbins, “Economics is a science which studies

human behaviour as a relationship between ends and scarce means
which have alternative uses.”

The following are the implications of the definition:

1) Human wants are unlimited

2) Means (resources) are scarce (Scarcity: limited nature of the society’s
resources)
3) Resources have alternative uses
 Important Definitions of Economics
4) Lionel Robbins

● Economics studies the efforts of man for allocating scarce resources

among the unlimited wants
● Economics is a human science and not a social science

● According to Robbins, Economics is neutral between ends:

Economics studies man’s activities in regards to all the goods and

services which satisfy human wants. Whether the wants are good or
bad, noble and ignoble, economics should study that.
 Important Definitions of Economics
5) Paul Samuelson

● An American Economist
● Famous book- ‘Economics: An Introductory Analysis’ (1948)
 Important Definitions of Economics
5) Paul Samuelson

● According to Paul Samuelson, “Economics is the study of Economic

growth. The main objective of economics is to increase social welfare
and improve the standard of living of the people by removing poverty,
unemployment, inequality of income and wealth.”
 Scope of Economics: Basic Economic Problems
- The scope of economics is nothing but the subject matter of
economics or the content of economics
- Core of Economics: the problem scarcity

[Scarcity: the limited nature of the society’s resources]

- The scope of economics can be obtained from the relevant questions

that have been asked by the economists and their modes of
answering these questions.

- Jacob Viner: “Economics is what economists do”

 Scope of Economics: Basic Economic Problems
1) What goods are to be produced and in what quantities by the
productive resources that economy possess?

- Arised due to the scarcity of resources

- We can’t satisfy all our wants by producing everything we want
- If a society decides to produce a particular good in a large quantity
then it has to withdraw some resources from the production of other
goods.
- Explanation with the help of example: Guns and Butter
 Scope of Economics: Basic Economic Problems

2) How are the different goods produced?

- Choice of production method

- Example: production of clothes
 Scope of Economics: Basic Economic Problems
3) For whom to produce?

- Distribution of national product among the different members of the

society
- Distribution of national product depends upon the distribution of money
income in the society
- More equal is the distribution of income, more equal will be the
distribution of national output.
 Scope of Economics: Basic Economic Problems
3) For whom to produce?

- How money income can be earned?

- Income also depends on the distribution of the ownership of property.

Family - B
Family - A Having
No Property Property
 Nature of Economics: Whether it is a Science or Art

● Science is a systematised body of knowledge ascertainable by

observation and experimentation.

● The essence of science is scientific method: dispassionate development

and testing of theories about how the world works.
 Nature of Economics: Whether it is a Science or Art

● For any discipline or subject to be a science it must fulfill the

following conditions;
1. Systematised body of knowledge
2. Has its own laws and theories
3. These laws and theories can be tested by observation and
experimentation
4. Can make predictions
5. Self-corrective
6. Have a universal validity
 Ten Principles of Economics

- Economics is unified by several central ideas

- Most important and fundamental contribution of Economics to human

understanding.
 Ten Principles of Economics

(1) People face Trade-offs

● Trade-offs: Compromise
● Examples of Trade-offs that individuals face:
1) Students: How to allocate their time
2) Parents: How to spend family income

● Examples of Trade-offs that society faces:

1) Trade off between Guns & Butter
2) Trade off between Cleaner environment & High level of income
3) Trade off between Efficiency & Equality
 Ten Principles of Economics

(2) The Cost of Something is What you give up to get it

● Whatever we give up to get something is called as opportunity cost

● People compare the cost and benefit of alternative course of action

● Examples:
1) The decision of the student to go to college
2) The decision of college athletes or sportsmen to drop out from the
college
 Ten Principles of Economics

(3) Rational People Think at Margin

● People systematically and purposefully do the best they can to

achieve their objectives, given the available opportunities.

● Compare the marginal cost and marginal benefit

● Example: the decision of a rational producer whether to hire an

additional labour
 Ten Principles of Economics

(4) People respond to Incentives

● An incentive is something (such as the prospect of a punishment or

reward) that induces a person to act.

● Examples:
1) Increase in the price of apples
2) Higher taxes on fuel
3) Crime rates do change with the change in penalties
 Ten Principles of Economics

(5) Trade can make everyone better-off

● Trade: exchange of goods and services

● Why do countries trade with each other?

● Trade allows countries to specialize in what they do best and

enjoy variety of goods and services
 Ten Principles of Economics

(6) Markets are usually a good way to organise economic

activities
● Two ways to organise the economic activities : 1) Markets & 2) Central
Planning (state)

● Markets are driven by the invisible hands of self-interest, forces of

demand and supply and competition

● These invisible hands ensure better quality products and low price of
goods in the market.
 Ten Principles of Economics

(7) Government can sometimes improve market

outcomes
● Government enforces rules and maintains institutions which are key to
the market

● Establish the institutions to ensure property rights e.g. courts, police

system etc.

● Government also plays a key role in correcting market failures like

externalities, market power and income inequality
 Ten Principles of Economics

(7) Government can sometimes improve market

outcomes
● Market failure: a situation in which markets fail to give socially
desirable outcomes

1) Externalities: is the impact of one person’s action on the well-being of

a bystander
2) Market Power: is the ability of a single seller or a small group of
sellers to influence the price
3) Income inequality
 Ten Principles of Economics
(8) A country’s standard of living depends upon its ability to
produce goods and services
● Large disparities in the standard of living around the world is due to
differences in productivity
● A country whose workers are more productive enjoys high standard of
living
(Productivity: the amount of goods & services produced from each unit of labour)

● What can be done to increase the productivity?

➢ Policy makers can raise the productivity by ensuring that the workers are
highly educated
➢ Firms should have necessary tools and advanced technology of production.
 Ten Principles of Economics

(9) Prices rise when government prints too much currency

● Inflation is nothing but the overall increase in the general price level in
the economy
● In almost all cases, the reason behind large & persistent inflation is found
to be excessive increase in the quantity of money in the economy
● Why does this happen?
 Ten Principles of Economics

(10) Society faces a short-run trade off between Inflation

and Unemployment
● Short-run: A period of an year or two
● Increase in the money supply Inflation

(Inflation)

Decrease in Unemployment
 Microeconomics & Macroeconomics

➔ The subject matter of economics is divided into two parts;

1) Microeconomics
2) Macroeconomics

➔ These terms were first coined by a Norwegian economist Ragnar Frisch

in the year 1933
 Microeconomics & Macroeconomics
Microeconomics

● Micro is derived from a Greek word ‘Mikros’ meaning ‘Small’

● Microeconomics is the study of how households and firms make decisions

and how they interact in the specific markets.

● Focuses on the economic actions & behaviour of individual units and small
group of individual units which includes consumers, workers, investors,
owners of land, business firms etc.
 Welfare
Microeconomics & Macroeconomics
economics
studies how
the allocation
of resources
affects the
economic
well-being
 Microeconomics & Macroeconomics
Microeconomics
● Micro economics is also called as ‘Price Theory’,/ ‘Value Theory’.

● According to Prof. Boulding, “Microeconomics is the study of particular

firm, particular household, individual price, wage, income, industry and
a particular commodity’’.

● For instance,
a) How the price of a particular good is determined in the market?
b) How consumers make purchasing decisions and how their choices are affected by
changing prices and incomes?
c) How firms decide the number of workers to be hired, how much quantity of goods to be
produced?
d) How workers decide where to work? Etc.
 Microeconomics & Macroeconomics
Microeconomics

● Importance of Microeconomics:

1. Explains the working of free enterprise (free market) economy.

2. Explains how prices are determined.
3. Explains conditions of efficiency in production and distribution.
4. Helps business executives and managerial decisions.
5. Helps the consumers to get maximum satisfaction.
6. Helpful in understanding the foreign trade.
Etc.
 Microeconomics & Macroeconomics
Macroeconomics
● The word ‘macro’ is derived from a Greek word ‘Makros’ meaning ‘Large’

● Kenneth E. Boulding says, “Macroeconomics deals not with individual

quantities but with aggregate of these, not with individual income but
with national income not with individual prices but with price levels not
with individual outputs but with national output.”

● Macroeconomics is also called as ‘aggregate economics’ and is also known

by the name of ‘theory of money, income and employment’
 Microeconomics & Macroeconomics
Macroeconomics

● Macroeconomics is the study of economy wide phenomena/ economy as a

whole

● Focuses on large aggregates as like national output, total employment,

total consumption, total savings, economic growth and development,
inflation etc.

● It also analyses the macroeconomic problems like inflation,

unemployment, income and wealth inequalities, poverty, trade cycles etc.
 Microeconomics & Macroeconomics
Macroeconomics

● Importance of Macroeconomics:

1. Gives us a bird’s eye view of the economy as a whole

2. Studies economic growth
3. Useful for formulation of economic policies
4. Studies about national output and income
5. Understanding the macroeconomic problems and suggesting probable
solutions
Etc.
 Positive Economics & Normative Economics

● Two approaches to study a particular problem in Economics

Positive Economics

- Concerned with ‘what is, it is’

- Describe economic events to understand how economy works
- Cause and effect relationships between two or more economic events
- For instance,
1) Why GDP growth declined in the last year
2) An increase in taxes cause people to work fewer hours
3) Why the wage rate in IT industry/ in agriculture is lower etc.
 Positive Economics & Normative Economics

Normative Economics

- Concerned with ‘what ought to be’ or ‘what should be’

- Evaluation of economic events is done through the ethical point of view
- Value judgements
- For instance,
1) What should be the minimum wage so as to ensure decent standard of
living
2) The consumption of alcohol should be discouraged by levying heavy
taxes etc.
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